Audit: ACA Subsidies vulnerable to fraud

WASHINGTON Government subsidies to help Americans buy insurance under the health care overhaul may be vulnerable to fraud, a Treasury Department watchdog warned Tuesday in the latest indication that troubles are far from over for President Barack Obama's signature legislation.

The rollout of the law has been hurt by canceled policies and problems with the federal website used by people to enroll in health plans, causing political headaches for the White House and for Democrats in Congress. The new problems concern subsidies that are available to low- and medium-income people who buy insurance through state-based exchanges that opened in October.

Those subsidies are administered by the Internal Revenue Service in the form of tax credits, and that's where the trouble arises.

“The IRS' existing fraud detection system may not be capable of identifying (Affordable Care Act) refund fraud or schemes prior to the issuance of tax return refunds,” said the report by J. Russell George, the Treasury inspector general for tax administration. “The IRS reported that the long-term limitations of its existing fraud detection system include its inability to keep pace with increasing levels of fraud,” the report said.

Sounding more upbeat, Acting IRS Commissioner Danny Werfel said, “The IRS has a strong, effective system in place for administering the Premium Tax Credit. We have a proven track record of safely and securely transmitting federal tax information and we have a robust and secure process in place to deliver this important credit for taxpayers.”

Also Tuesday, the administration released a 50-state report saying that nearly 1.5 million people were found eligible for Medicaid during October. As website problems depressed sign-ups for subsidized private coverage, the safety-net program for low-income people saw a nearly 16 percent increase in states that have agreed to expand it, according to the Department of Health and Human Services.

Any problems with the health care tax credits probably won't come to light until taxpayers file their 2014 tax returns in the spring of 2015.

Most of the credits will be paid directly to health insurance companies, with taxpayers seeing the benefit in reduced premiums. Other taxpayers, however, can claim the credits on their federal tax returns, starting with 2014 returns.

Under the health care law, the IRS is in charge of verifying eligibility for the tax credit and calculating the amount. Taxpayers, however, will have to be careful when they apply for the credits. If taxpayers' incomes increase while they are receiving the credit, and they get a larger credit than they are entitled to, they may have to repay some or all of the credit when they file their federal tax returns.

On the other hand, if taxpayers get a smaller credit than they are entitled to, they can get the difference in the form of a tax refund.

The inspector general's report says the IRS did a good job of accurately calculating the amount of tax credits when auditors ran tests on the system before the health exchanges opened. However, the report warns that IRS systems may not be capable of detecting schemes by people who fraudulently claim refunds.

“The Obamacare premium subsidies are a fraudster's dream come true,” said Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee. “The very nature of these credits – pay first, verify a person's income later – will lead to potentially hundreds of billions of dollars of improper payments.”

Werfel, however, has said the health care credits may be less susceptible to fraud because most taxpayers won't receive any cash.

The subsidies are available to people who do not have access to affordable coverage through their jobs and make between the poverty line and up to four times that level. For a family of four, that's between $23,550 and $94,200.

The Congressional Budget Office has estimated that more than 80 percent of the people who obtain coverage through the law's new insurance markets will be eligible for some level of subsidy to help pay their premiums.

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